The Goods and Services Tax Appellate Tribunal (GSTAT), Cuttack State Bench, has held that the retrospective cancellation of a supplier’s GST registration cannot, by itself, justify denial of input tax credit (ITC) to the purchasing taxpayer. The department must examine the underlying transactions and establish the recipient’s failure to satisfy the applicable statutory conditions.
The bench of Suchismita Misra (Judicial Member) and Ranjan Kumar Sahoo (Technical Member) ruled that proceedings under Section 74 of the Central Goods and Services Tax Act and Odisha Goods and Services Tax Act cannot be initiated mechanically by presuming fraud merely because the supplier was subsequently found non-existent.
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The Bench quashed the adjudication and first appellate orders concerning disputed ITC of ₹8,95,252, interest of ₹9,15,364, and an equivalent penalty of ₹8,95,252.
However, the Tribunal did not finally allow the disputed credit. It directed the proper officer to determine ITC eligibility by treating the Section 74 notice as a notice under Section 73, in accordance with Section 75(2), after considering the evidence and granting an appropriate opportunity of hearing.
The dispute concerned ITC claimed on purchases made during January 2018 from M/s Annapurna Enterprises.
The department alleged that the supplier was a non-existing business entity that had issued invoices without actually supplying goods. Although the transactions appeared in the supplier’s GSTR-1, the department maintained that the recipient had availed credit without receiving the goods, contrary to Section 16(2)(b).
A show cause notice under Section 74 was issued on December 27, 2021. The adjudicating authority subsequently passed a demand order on May 31, 2022.
The first appellate authority upheld the denial of credit through an order dated July 31, 2024, prompting the taxpayer to approach the Tribunal under Section 112.
The taxpayer maintained that the purchases were genuine and that the goods had been physically received, entered in the books of account and paid for through banking channels.
According to the taxpayer, the supplier had issued tax invoices, reported the transactions in GSTR-1 and discharged its output tax liability through GSTR-3B. The corresponding invoices were also reflected in the recipient’s GSTR-2A.
The taxpayer argued that the supplier’s registration was cancelled on July 6, 2019, approximately eighteen months after the disputed supplies. Its subsequent cancellation could not automatically invalidate transactions undertaken when the supplier appeared as an active registered taxpayer.
The taxpayer also contended that the department had failed to investigate transportation records, stock entries, purchase records and banking transactions before denying credit.
During the Tribunal proceedings, the taxpayer submitted further particulars intended to trace ten invoices through transport documents, stock inward entries and payment records.
The department maintained that possession of invoices, an active GST registration and reporting of transactions on the portal did not conclusively establish physical delivery of goods.
It argued that the recipient bore the burden under Section 155 of proving the genuineness of the transactions and actual receipt of goods.
The department also relied on verification concerning the supplier’s declared business premises and its failure to respond to summons. It contended that the circumstances justified proceedings under Section 74.
Alternatively, it requested that, if the fraud proceedings were found unsustainable, the notice be treated as one issued under Section 73 through the mechanism provided in Section 75(2).
The Tribunal found that the department had treated the supplier’s retrospective registration cancellation as conclusive proof that the recipient was ineligible for ITC.
It observed that the proceedings rested on the presumption that, because the supplier’s registration had been cancelled on the ground of non-existence, the supplies must have been fictitious.
Rejecting this approach, the Tribunal explained that the statutory power to cancel registration retrospectively does not automatically determine the consequences for every purchaser who dealt with that supplier.
The department was required to investigate the transactions between the supplier and recipient before reaching a conclusion.
The Tribunal held that retrospective cancellation did not, without further examination, establish that the recipient never received the goods, that the transactions were fictitious, or that the recipient participated in wrongdoing.
Accordingly, a supplier’s misconduct could not automatically be attributed to the purchaser without examining the purchaser’s own transactions and statutory compliance.
The Tribunal clarified that its findings did not confer an unconditional entitlement to credit.
ITC remained subject to compliance with the applicable conditions and restrictions under the GST legislation, including the requirement of actual receipt of goods.
The ruling therefore required an evidence-based determination: the department could not deny credit solely because of retrospective cancellation, while the taxpayer remained responsible for substantiating its claim through relevant records.
The final directions specifically required the proper officer to consider all evidence, including the additional material produced by the taxpayer concerning the genuineness of the transactions.
On the invocation of Section 74, the Tribunal found that the department had proceeded mechanically without identifying sufficient foundational facts showing deliberate wrongdoing by the recipient.
The allegation that the supplier was non-existent had effectively been used to conclude that the recipient’s ITC claim was fake.
The Tribunal held that fraudulent intent had to be established through actual evidence rather than presumption. The department bore the burden of setting out facts and providing cogent reasons for alleging fraud, wilful misstatement or suppression of facts.
It found that the notice had been issued without adequate preliminary verification or evidence establishing that the recipient had intentionally availed wrongful credit through such conduct.
The Tribunal also criticised the adjudicating and first appellate authorities for mechanically denying ITC without adequately examining the evidence.
Consequently, it held that the Section 74 proceedings could not be sustained.
The taxpayer had also challenged the proceedings on the ground that cross-examination of the officers who reported the supplier’s non-existence had not been permitted.
The Tribunal explained that the right to cross-examination in GST adjudication depends on the facts of the case.
Where an adverse decision substantially rests on an uncorroborated witness statement, denial of cross-examination may affect the validity of the proceedings. However, where the dispute can be addressed through invoices, transportation documents and other primary records, denial of cross-examination does not automatically invalidate the proceedings.
In this case, the taxpayer claimed to possess documentary evidence capable of establishing genuine receipt of goods. The Tribunal therefore held that the denial of cross-examination did not, by itself, vitiate the proceedings.
Having found the Section 74 notice unsustainable, the Tribunal considered the application of Section 75(2).
That provision permits determination under Section 73 where an appellate authority, Tribunal or court concludes that the allegations of fraud, wilful misstatement or suppression supporting a Section 74 notice have not been established.
The Tribunal examined the notice date against the limitation applicable to proceedings under Section 73. It noted that the disputed transactions related to financial year 2017–18 and that the notice had been issued on December 27, 2021.
On its examination of the applicable extensions, it concluded that the notice fell within the period permitting its treatment as a deemed notice under Section 73.
Accordingly, the proper officer was directed to determine the availability of ITC under Section 75(2), treating the original Section 74 notice as one issued under Section 73(1).
The Tribunal set aside the adjudication order dated May 31, 2022, and the first appellate order dated July 31, 2024, with consequential benefits.
It directed that the taxpayer be given an appropriate opportunity of hearing and that all relevant evidence be considered during the fresh determination.
The Tribunal expressly instructed the department not to treat retrospective cancellation of the supplier’s registration, by itself, as conclusive proof that the recipient had not received the goods.
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